The Financial Conduct Authority’s (FCA) proposed motor finance redress scheme is facing growing legal pressure from lenders, claims firms and consumer groups, as debate intensifies over who should qualify for compensation and how payouts will be calculated.
With the regulator expected to confirm its final approach later today, attention is shifting to whether the scheme can withstand potential legal challenges.
Lenders to challenge scope?
Industry concerns centre on whether the definition of “unfairness” is too wide, potentially increasing the compensation bill beyond current estimates of around £11bn, and whether a standardised approach can accurately reflect every agreement.
Full timeline: from commission to compensation
There is also concern that retrospective application of the rules could be challenged on the basis of legal certainty, particularly where historic commission models were widely used across the market.
Legal action or judicial review remains a possibility if lenders believe the scheme places disproportionate liability on them.
Pressure on the sector is already visible in lender behaviour. The Banker reports that Secure Trust Bank has exited motor finance after seven years of losses, cutting around 200 roles and setting aside £21.5m in provisions ahead of the FCA scheme.
The lender sold its remaining vehicle finance loan book to LCM Partners in a £458.6m deal and is targeting £25m in cost savings following the exit.
“It was still losing money and I’m not sure we had the operational capability across the organisation to run it as tightly as you need to run that sort of business,” Ian Corfield, chief executive of Secure Trust Bank. “The regulatory environment didn’t help. But to be frank, we were going to have to (exit) anyway,” he added.
Despite the sale, the bank will retain responsibility for potential redress liabilities linked to historic agreements, underlining the ongoing financial exposure facing lenders even if they exit the sector.
CMCs escalate legal action
At the same time, claims management companies (CMC) and consumer groups are actively preparing legal action, with one high-profile case already emerging.
Lloyds Banking Group is facing a £66m court battle brought by claims law firm Courmacs Legal on behalf of 30,000 borrowers linked to its motor finance arm, Black Horse.
The Guardian newspaper reports that the case would, if it goes ahead, see consumers opting out of the FCA’s redress scheme before its final details are confirmed, amid concerns that the regulator’s approach could result in lower payouts.
“The FCA’s proposed redress scheme looks like it will let lenders off the hook because the banks have lobbied to minimise payouts to victims,” Darren Smith, managing director of Courmacs Legal, said. “If the regulator had put consumers first, the decision to use the courts would not be this attractive. We had no choice but to act in the best interests of our clients and will continue to do so.”
Claims firms argue that average payouts under the FCA scheme could be around £700 per case, compared with far higher estimates suggested by some campaign groups.
This has fuelled claims that the scheme could exclude some borrowers or undercompensate those who paid more over the life of their agreements, particularly where eligibility is tied to specific commission models rather than total financial detriment.
The Lloyds case is expected to be the first in a series of group legal actions against major lenders, with further omnibus claims anticipated later this year.
However, parallel legal action from lenders could complicate proceedings, with a Court of Appeal case due to be heard in April that seeks to block group claims.
A spokesperson for the FCA told The Guardian: “A redress scheme would be free to use, meaning consumers get fair compensation more quickly and don’t lose as much as 30% of it in fees. Legal representatives need to weigh carefully what is in their clients’ interests.”
The FCA is seeking to deliver a standardised, largely automated scheme, but this approach may itself come under scrutiny if it is seen to limit individual assessment or routes for appeal.
If legal challenges intensify, the rollout of the redress scheme could be delayed or reshaped, extending uncertainty for the sector well into 2026.
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